Looking for ways to close our first deal

[Mike Lowery]

My partner @Jonathan West and I have found an off-market four family that we are interested in purchasing from a seasoned investor. This property is in a great location and the numbers work out based on our conservative analysis. We want to build a relationship with the seller as he and his mother will be looking to get out of the game in the future and it would provide us the opportunity to purchase his investment properties prior to them hitting the market. 

The purchase price has been agreed upon at $185K. The most recent comparable is located a few blocks away and sold in November of 2016 for $209K. While we could get conventional financing, we are trying to think of creative ways to finance this deal. The seller's wife is not happy doing land contract, but my be willing to carry a second for part of the down payment. 

It appears as if the seller is dealing with a lender that also has an early payment penalty clause for about another year, so we were looking into helping him out with that and possibly taking over ownership, but not recording it and paying off the loan until the penalty lapses. 

Any thoughts on how to structure this without doing a conventional loan?

[Chris Low]

Have you looked into doing a lease option? There should be some blogs and forum posts on lease options on the BP website.

[Patsy Waldron]

It sounds like a master lease would work well in this case.  You lease it from the owner for a set monthly amount (which covers his mortgage, interest, taxes and insurance plus some extra) and transfer ownership when he is out of his pre-payment penalty period, I.e. in a year you go apply for a conventional loan and buy the building outright. 

[Shaun Patterson]

Yes I would also agree that the lease option is the best. Hold it for a year get the difference between what your paying them and keeping and hold it for extra down payment money. This doesn't show anywhere which is what you guys needed. Now my question would be does this property need any work? If so this can be a way to help yourself and the current owner. While showing them the lease option break out a plan that explains what you will be doing to the property to create value during that time. This will help cool there heads that your not just trying to take some money from them for 3 years and then change your mind.

[Mike Lowery]

Chris Low and Patsy Waldron it sounds like the sellers wife wants something more finite. Either they will keep the property or sell it outright. The seller is frustrated as well and is asking his attorney to perhaps provide insight on the situation so the sellers wife doesn't feel like they are getting burned or carry the burden of all the risk.
We have tried verbally agreeing to some sort of owner financing deal and was reaching out to see if anyone has heard of other options we may have besides the tradition lease option or seller financing.
The property is located in Milwaukee, Wisconsin and we feel like the price is fair. Ultimately we would like to get into the deal with less money down as this seller has at least one other four family we would be interested in as well and we don't have enough capital for the down payment on two four family properties.

[Svetlana Foley]

Sounds like your  options are full conventional. partial seller financed dp or lease as suggested above.  Find out exactly how much the penalty would cost them in dollars, and agree to a bit higher percentage on the seller finance amount.  Lets just say it will cost them 10k to get paid now/penalty for early payment, if they make 11k by loaning money to you at 10% (or whatever makes sense to both parties), show the wife that they will actually be making money by going that route.

[Casandra M.]

It sounds like the Seller's wife needs to be educated on the benefits of having several options available to them.... would the sellers be able to refinance their current loan into something more favorable, and then sell the property to you? The refinance costs may be less than the pre-payment penalty.

EDIT: This would also require an appraisal on the seller's part, which would benefit you as the buyer, in case the property comes in under expected market value. 

[Scott Schultz]

Based on you description I'm assuming this is a class B property, It would make me nervous buying this close to retail ant what appears to be nearing the top of a market cycle. Regardless, is the property in a stand alone LLC? Could you possibly buy the entity and assume the loan? Just a thought, the twist get transactional financing and refi using equity as part of your DP, good luck!

[Brock Y.]

All the above options would be what I would do. Other option is to look at private money or bring on another investor as an additional partner.

[Patsy Waldron]

Well, until and unless the husband and wife get on the same page and make up their mind one way or the other, you're just going to be strung along. A master lease really does not carry risk for the seller- you will be paying them and the property remains theirs until you buy outright. And you mentioned that he had some pre-payment penalty if he sells immediately, so this arrangement would help him out in that way, too. In return for being so patient and acccommodating, you get to buy both buildings with a little seller help! Removes the hassle  of finding another buyer and paying realtor fees for the seller!

If master lease and/or seller financing are out, you can try getting a hard money loan and refinancing in a year (numbers would be tight, but if purchase price is right, this is feasible). Or buying one property in the traditional way, with bank financing, and use your equity in it as collateral to buy the next 4-unit (hopefully with some seller financing). 

[Nathan Schoenborn]

Ask them what they plan on doing with the money after they sell. If they're investing in stocks or putting it in the bank, the higher interest they could get from loaning you the money may be an incentive. Also, you could try buying both the four units at once, that may be the push they need to give owner financing. I've always believed in "one person sets the price, the other sets the terms." Maybe offer them 5k over their asking price if they do owner financing. Some sellers only see that final sales number and it will be worth it to you in the long run.

[Erik Peterson]

I would reiterate to be careful not to get strung along. It has happened to me two times, each was a "motivated" seller who came to me. Each time they ended up going with someone new who came into the picture and made it seem like they had a more-simple, or easier/quicker deal than they had with me. Both times I didnt see it coming.

[Ray Johnson]

@Mike Lowery the one thing you haven't mentioned is what is the prepayment penalty amount? If they're in the last year of a prepayment penalty clause, the amount shouldn't be that much since the penalty decreases as during the loan phase. You mentioned that your team is approaching this deal with conservative numbers, you should have a little room to negotiate, If it's a small amount for the penalty work it into the deal and get the deal done. 

[Mike Lowery]

Thank you all for the responses, it is much appreciated. I do have to say that there are plenty of good options and points being presented, but the one that stood out was about not getting strung along. In the end we have to determine if they will offer any sort of financing AFTER educating the wife. Hopefully this is something his real estate attorney can assist with. If not then we have to seek conventional financing and purchase it the old fashioned way. Most importantly though is to keep pushing forward and making progress either towards a sale, or walking away and looking for other investments. Thanks again guys!

[Marcus Auerbach]

@Mike Lowery and @Jonathan West congratulations on the deal.

Couple comments: you guys are CRAZY to not get it finanzed conventionally if you can - a 30 year fixed rate mortgage is the ultimate choice gold standard, especially with rates as low as we (still) have them. Owner financing is typically higher interest rates and much shorter than 30 years (like 3 or 5 years!). There is a round about way to structure this with 10% down with the right lender, probably cheaper than with a seller carry back.

Lease option is a good idea if the penalty is substancial. It can be structured very easily to be a iron clad contract just by using a large option fee - 10% would make it very hard for you to walk away from the deal. (I can draft the contracts if you wanted me to, the seller would pay for that). But I still feel that deferring the sale would be more in the interest of the seller than yours given the probably rising interest rates - I would get a mortgage much rather now than in a year from now. Pre-payment penalties are often structured as 3%, 2%, 1% and then zero by year four, so it's probably just 1% of the loan amount - not that much. 

[Mike Lowery]

Marcus Auerbach I'm currently traveling. Can you please PM me details of how you can finance this deal?

[Preston Schmidt]

Let me know if I can help answer and financing questions Mike.

[Troy Owen]

Mike have you applied for financing at the sellers bank?  If you get a loan from the same bank there is a much better chance of them waiving the penalty.  There is a good chance he is using Waterstone Bank and they love them some pre-payment penalties!  The easiest solution would be to ask the bank to waive the pre-payment penalty.  If he only has one property with them it may not happen but if he has multiple properties there is at least a small chance they will drop the pre-payment penalty.  If you are getting a good price on the property it may make sense for you to pay his pre-payment penalty. A 2% penalty on a $200,000 loan is only $4,000.  If you pay an extra $4,000 or meet him somewhere in the middle, is it still a good deal?

-Troy